Tax & Business Law Commentary

Friday, January 19, 2007

The following question was posed on the Maryland State Bar Association's Small and Solo Practice listserv discussion group:

Hello List,

First let me start by saying I hope my question doesn't offend anyone but I wanted to hopefully find someone who could point me in the right direction. I had a potential client call today and ask me to draft a "Domination Contract." I had no idea what that was until the client explained that she has been requested to be a Dominatrix by someone else and she would like me to draft a contract outlining their "do's and don'ts" of their session or meeting I guess. I'm not sure what would really go into a "contract" of this sort.

Is this even legal? I am not sure where to start looking. I was going to try to type in interesting keywords in westlaw to see if anything popped up. If anyone can help me or point me towards a great source I would appreciate it.

Of course, the question that first occurred to me is: Is the "Dominatrix" an independent contractor or an employee? This has obvious income tax and FICA/SECA implications.

My second thought went to the Martin Mull song, some of the lyrics of which are as follows:

Saturday, January 13, 2007

In 1770, a prominent Boston lawyer represented the Capt. Thomas Preston and the British soldiers after the Boston Massacre. They were immensely unpopular. This account of that lawyer's recollection of his retention for the defense was posted on October 20, 2006, on the blog, Boston 1775:

The next Morning I think it was [i.e., 6 March 1770], sitting in my Office, near the Steps of the Town house Stairs, Mr. [James] Forrest came in, who was then called the Irish Infant. I had some Acquaintance with him. With tears streaming from his Eyes, he said I am come with a very solemn Message from a very unfortunate Man, Captain Preston in Prison. He wishes for Council, and can get none.

I have waited on Mr. [Josiah] Quincy, who says he will engage if you will give him your Assistance: without it possitively he will not. Even Mr. [Robert] Auchmuty declines unless you will engage. . . .

I had no hesitation in answering that Council ought to be the very last thing that an accused Person should want [i.e., be without] in a free Country. That the Bar ought in my opinion to be independent and impartial at all Times And in every Circumstance. And that Persons whose Lives were at Stake ought to have the Council they preferred: But he must be sensible this would be as important a Cause as ever was tryed in any Court or Country of the World: and that every Lawyer must hold himself responsible not only to his Country, but to the highest and most infallible of all Trybunals for the Part he should Act.

He must therefore expect from me no Art or Address, No Sophistry or Prevarication in such a Cause; nor any thing more than Fact, Evidence and Law would justify. Captain Preston he said requested and desired no more: and that he had such an Opinion, from all he had heard from all Parties of me, that he could chearfully trust his Life with me, upon those Principles.

And said Forrest, as God almighty is my judge I believe him an innocent Man. I replied that must be ascertained by his Tryal, and if he thinks he cannot have a fair Tryal of that Issue without my Assistance, without hesitation he shall have it.

Upon this, Forrest offered me a single Guinea as a retaining fee and I readily accepted it. From first to last I never said a Word about fees, in any of those Cases, and I should have said nothing about them here, if Calumnies and Insinuations had not been propagated that I was tempted by great fees and enormous sums of Money.

Before or after the Tryal, Preston sent me ten Guineas and at the Tryal of the Soldiers afterwards Eight Guineas more, which were all the fees I ever received or were offered to me, and I should not have said any thing on the subject to my Clients if they had never offered me any Thing.

This was all the pecuniary Reward I ever had for fourteen or fifteen days labour, in the most exhausting and fatiguing Causes I ever tried: for hazarding a Popularity very general and very hardly earned: and for incurring a Clamour and popular Suspicions and prejudices, which are not yet worn out and never will be forgotten as long as History of this Period is read.

For the Experience of all my Life has proved to me, that the Memory of Malice is faithfull, and more, it continually adds to its Stock; while that of Kindness and Friendship is not only frail but treacherous. It was immediately bruited abroad that I had engaged for Preston and the Soldiers, and occasioned a great clamour which the Friends of Government delighted to hear, and slyly and secretly fomented with all their Art.

The attorney was, of course, John Adams, second president of the United States.

Compare his actions to the remarks of Charles D. Stimson, the deputy assistant secretary of defense for detainee affairs, reported here.

Thursday, January 04, 2007

We officially rolled out the Maryland Courts Watcher by posting the following announcement on various Maryland State Bar Association listserves:

We are happy to announce the availability of a new free service, Maryland Courts Watcher.

Maryland Courts Watcher posts synopses of every judicial opinion available on the web. That includes the opinions of both of the Courts of Appeal, the United Stated District Court for the District of Maryland, the United States Bankruptcy Court for the District of Maryland, the Circuit Court for Baltimore City, the Business and Technology Courts for Maryland, and the Maryland Tax Court.

All postings include links to the full opinions. Postings are available on the web or via email, RSS, or Atom syndication.

Each posting has labels attached that will enable research into topic areas. Each case also has labels for the judge who authored the principal opinion and any judge who authored a concurring or dissenting opinion. Over time, this will allow users to develop a profile for any particular judge to get a better idea how he or she will approach a particular type of matter. Readers are also able to perform Google searches on the website.

Readers can post comments to any posting. We hope that, in time, this capability will allow the website to become a venue for serious discussion of issues raised by court opinions.

The website for Maryland Courts Watcher is:

http://marylandcourts.blogspot.com/

Finally, we want and need additional editors to help out with the postings. If you want to volunteer, please send an email to mcw[symbol for "at"]taxation-business.com, using the subject line “MCW Volunteer.”

We have posted a more complete description of Maryland Courts Watcher in FAQ fashion here.

Monday, January 01, 2007

Pet ownership was very lightly associated with poor health in the general working-aged population when using several health and disease indicators. Pet owners had a slightly higher [Body Mass Index] than the rest, which indicates that people having a pet (particularly a dog) could use some exercise.

I agree with the Tax Foundation that funding government via a state operated gambling operation is poor tax policy. My primary objection is that the revenue garnered through gaming operations is, in effect, a regressive form of tax. However, I would not say, as the Tax Foundation does (quoting an article from the Lottery Post),that:

The lottery's diminishing contribution to the state budget is one of many reasons why Maryland is facing nearly $8 billion in deficits over the next five years, analysts say.

That's a great point. It is, alas, basically not true. In the last six fiscal years, the gross revenue and net revenue (after expenses) from the lottery to Maryland's treasury were as follows:

As shown in the above table, the total net revenues over the six year period from the lottery increased by about 25%. Maryland State's expenditures over that period increased by less than 29%, that is, a percentage that is only slightly more than percentage growth of the lottery. Thus, while it is literally true that the lottery's contribution to the state budget has been "diminishing," neither the rate nor amount of decline could be said to materially contribute to a looming $8 billion budgetary shortfall (in a budget that, in FY 2006, was slightly less than $26 billion). (Note: The shortfall is projected over a 5 year period. My back of the envelope estimation tells me that the shortfall will be about 6% of the budget. That's a problem, but hardly a catastrophe.)

Note to The Tax Foundation: Even good arguments are undermined when their proponents substitute truthiness for truth.

Okay, no one is going to bid $51 million to negotiate with a player just because they think he’s good. Obviously, the Red Sox expect that signing Matsuzaka will give them marketing inroads in Japan, and make them a lot of money in the Far East. How much can they expect to make?

I’ll start off by saying that I have no idea, but we can still try to generate an estimate. There have been two situations in the past similar to this one: The Mariners’ signing of Ichiro Suzuki and the Yankees’ signing of Hideki Matsui. Why not examine how much money they made from that?

Unfortunately, there are no direct numbers on the teams’ revenues in Japan, so the only estimate we can make is going to be based off indirect evidence. Using Forbes reports on team revenues for the past seven years, here is what I found:

* In 2001, Ichiro’s rookie season, the Mariners made $27 million more than they had the previous year. The five teams closest to Seattle in revenues in 2000 increased their income by an average of just $6 million.

* In 2003, Matsui’s rookie season, the Yankees increased their revenues by $8 million. The five teams closest to the Yankees in 2002 revenues upped their earnings by an average of $4 million.

* Between 2000 and 2006, Seattle’s revenues have increased by $67 million. The five teams closest in revenues to Seattle in 2000 have seen their income increase by an average of $54 million.

* Between 2002 and 2006, the Yankees’ revenues have gone up $62 million, versus an average increase of $21 million for the five teams closest to them in revenues in ’02.

If average all of that together, we can estimate that signing a Japanese star player is worth something like $9 million a year. But wait, we’re not done. $9 million in 2001 is not the same as $9 million in 2007. Adjusting for inflation (in baseball, inflation has held at a pretty steady 10% a year), we find that the Red Sox should expect to see their revenues in 2007 to increase by about $14 million should they sign Matsuzaka. That’s a sizeable chunk of change.

In other words, by selling additional products, media rights, etc., back to Japan, the balance of trade flow moves in the other direction, back to the U.S.

I don't know enough about the overall economics of baseball to tell whether the Matsuzaka deal is good or bad. However, I still think that its overall effects on the balance of trade are likely to be negative.

A state cannot impose a tax on a business engaged in interstate commerce unless, inter alia, the business has a substantial nexus with the state. In the sales tax area, in Quill Corp. v. North Dakota, the U.S. Supreme Court has held that there is such nexus only when the seller of taxable goods or services has a physical presence in the state attempting to impose the tax. The question remains open, however, whether substantial nexus sufficient to support the imposition of income tax requires the physical presence of the taxpayer.

In MBNA, the West Virginia Supreme Court held that the actual physical presence of a taxpayer was not required to allow the state to impose income tax. The money quote is the antithesis of the doctrine of original intent:

[P]rior to concluding, we simply wish to acknowledge the great challenge in applying the Commerce Clause to the ever-evolving practices of the marketplace. James Madison, Benjamin Franklin, and the other Framers at the Constitutional Convention who adopted the Commerce Clause lived in a world that is impossible for people living today to imagine. The Framers' concept of commerce consisted of goods transported in horse-drawn, wooden-wheeled wagons or ships with sails. They lived in a world with no electricity, no indoor plumbing, no automobiles, no paved roads, no airplanes, no telephones, no televisions, no computers, no plastic credit cards, no recorded music, and no iPods. Likewise, it would have been impossible for the Framers to imagine our world. When they fashioned the Commerce Clause, they could not possibly have foreseen the complex and varied ways that commerce is conducted today, especially via the internet and electronic commerce. It would be nonsense to suggest that they could foresee or fathom a time in which a person's telephone call to his or her local credit card company would be routinely answered by a person in Bombay, India, or that a consumer could purchase virtually any product on a computer with the click of a mouse without leaving home. This recognition of the staggering evolution in commerce from the Framers' time up through today suggests to this Court that in applying the Commerce Clause we must eschew rigid and mechanical legal formulas in favor of a fresh application of Commerce Clause principles tempered with healthy doses of fairness and common sense. This is what we have attempted to do herein.

Since I represent clients in this area, I will not offer any editorial comment on the West Virginia opinion. I would note, however, that the Court's holding is diametrically opposite to the holding of an intermediate appellate court that considered the same issue and was presented with essentially the same facts. See J.C. Penney Nat'l Bank v. Johnson, 19 S.W.3d 831 (Tenn.Ct.App. 1999). My guess is that this case will either go to the Supreme Court or it will set off a chain reaction of tax litigation in other states that will ultimately have to be resolved by the Supreme Court.

Sunday, December 10, 2006

Today, the Baltimore Sun published an article on statutory ground rents, a form of real estate interest little-known outside of the Baltimore area. The thrust of the article was that, as real estate prices in Baltimore City have risen, there has been a dramatic increase in homeowners being ejected from their property due to delinquencies in their payment of ground rents.

I am not certain that the situation is as much of a public policy problem as the article contends. However, the article sheds some light on the continued need for and vitality of newspapers. It also shows how newspapers can produce an important product in the age of cyber information.

As to the first point, the article online omits a sidebar that was presented in the print version of the paper. That sidebar gave some background on the manner as to how the article was prepared. It is obvious that the Sun put substantial resources into the piece. I would ask anyone who contends that blogs could displace newspapers as a primary source of news whether any blog could muster the resources necessary to research and write a similar article.

As to the second point, it is of some interest that the article was designed with web-multimedia in mind. In addition to the text that appeared in the print version, on the web there are two video presentations and two audio presentations. It appears that the Sun understands that it can't limit itself to producing a print product.

Finally, it is worthy of some note that the subject of article is inherently local. At one time, the Sun was truly a national newspaper. That is no longer the case because it can't compete with WaPo, the NYT, the WSJ, the LAT, etc. However, there is still important work to do locally and it's comforting to see that the Sun remains committed to covering local stories in a serious way. Of course, it remains an open question as to whether papers such as the Sun can make money with this more narrow focus.

Saturday, December 09, 2006

I am pleased to announce the creation of a new weblog, Maryland Courts Watcher, that I will edit along with a number of other people.

Maryland Courts Watcher will post synopses of all formal opinions issued by the Court of Appeals and Court of Special Appeals of Maryland and synopses of selected opinions from other courts in Maryland. It will not contain any editorial comment, but will link to commentary posted on other blogs.

The blog is designed both to alert readers to new developments in Maryland courts that they may be interested in and to also provide a research tool outside of the commercial services. Thus, all postings can be searched through a Google custom search and each entry has subject tags.

Wednesday, December 06, 2006

Confessed Judgment - Purchase of Residential Property - The Provisions for Payment - Partial Defaults of Payment - The Attorneys' Negotiations - The Confessed Judgment Notes - Confessed Judgment - The Allocation of the Burden of Proof - What is a Meritorious Defense? A Question of Law for the Court - A Meritorious Defense to What? - The Antecedent Debt - Section 14-1315 Applies - Late Fees - Of Ships and Shoes and Sealing Wax . . .

The occasion was a letter written to Rex Tillerson, the CEO of ExxonMobil by Jay Rockefeller (D. W.Va.) and Olympia Snowe (R. ME). The letter attacked ExxonMobil's past efforts as a leader of the global warming deniers and the Senators urged Tillerson to lead ExxonMobil to:

end its dangerous support of the "deniers" . . . . [and] to guide ExxonMobil to capitalize on its significant resources and prominent industry position to assist this country in taking its appropriate leadership role in promoting the technological innovation necessary to address climate change and in fashioning a truly global solution to what is undeniably a global problem.

Ribstein cheered the WSJ editorial that characterized Rockefeller and Snowe as "bullies." According to Ribstein:

The letter doesn't threaten explicitly. But if a 300 pound bouncer is standing over you and asking you pretty please to stop, no explicit threats are really necessary. These are two prominent senators and, as the WSJ editorial points out, there's any number of things the government can do to a corporation.

A few points:

First, Rockefeller and Snowe are not the "government." They are two senators, one from each side of the aisle. Thus, their actions differ significantly from, for instance, the last six years of Rove-lead shakedown of corporate interests to fund the partisan advantage of the Republican party. (An effort, by the way, that the WSJ editorial board joined in as cheerleader-in-chief.)

Second, ExxonMobil does not attempt to speak to these public issues directly. Rather, it hides behind front groups that it funds lavishly.

Third, ExxonMobil does not fund science. It funds pseudo-science designed to advance its short-term economic interests at the expense of the commonwealth. Between 1998 and 2005, it gave over $2 Million to the Competitive Enterprise Institute ("CEI"), a right-wing think tank. See here. Further, according to Rockefeller and Snowe:

A study to be released in November by an American scientific group will expose ExxonMobil as the primary funder of no fewer than 29 climate change denial front groups in 2004 alone. Besides a shared goal, these groups often featured common staffs and board members. The study will estimate that ExxonMobil has spent more than $19 million since the late 1990s on a strategy of "information laundering," or enabling a small number of professional skeptics working through scientific-sounding organizations to funnel their viewpoints through non-peer-reviewed websites such as Tech Central Station.

It is a false analogy to compare, as the WSJ editorial does, ExxonMobil's and CEI's efforts to those of "the Pew Charitable Trusts, the Sierra Club, [and] Environmental Defense [sic]." These organizations have no predetermined economic interest in taking one side or the other in any scientific dispute. Obviously, that is not the case with respect to ExxonMobil. The recipients of its largess are intended to merely mouth the party-line.

Senators Rockefeller and Snowe have it precisely right:

ExxonMobil and its partners in denial have manufactured controversy, sown doubt, and impeded progress with strategies all-too reminiscent of those used by the tobacco industry for so many years.

Let's be candid here: ExxonMobil is not funding the "other side" in some spirited and free scientific debate. Rather, ExxonMobil is engaged, as the Senators say, in a campaign of misinformation designed to support its narrow economic interests.

The evidence of . . . changes [such as rising global temperatures, the shifting of plant and animal ranges, the global retreat of glaciers, and the retreat of arctic sea ice, with sea levels rising and oceans becoming more acidic], though attended by the uncertainty or caveats that appropriately accompany scientific knowledge, is nonetheless so compelling that it has crystallized a remarkable consensus within the scientific community: climate warming is happening, and human activities are very likely a significant causal factor. The nature of this consensus may be obscured in a public debate that sometimes equates consensus with unanimity or complete certainty.

To be blunt, large corporate interests are simply too well-heeled to allow them to have free rein in their efforts to influence the public debate, camouflaged by front groups. As we've seen with tobacco, lead, asbestos, auto design, and in so many other cases, the outcome of allowing this "corporate free speech" is all too often massive injury, sickness, and death.

Tuesday, November 28, 2006

There has been a lot of hoo-ha in the media about how the voter shift to the Democrats was not nearly as great as is typically the case in mid-term elections. Just to check, I compared the overall vote for the House of Representatives in 1994 with the vote this year.

In 1994, allegedly a banner year for the Republicans, the Republicans got 51.5% of the popular vote for members of the House compared to 44.7% for the Democrats, a little less than a 7 point spread. See here.

This time out, the percentages were 57.7% for the Democrats and 41.8% for the Republicans, a little less than a 16 point spread. That is, better than double the spread of the Republicans in 1994. See here.

However, the total seats won by each party in the two elections were virtually the same, with the Republicans getting 230 seats in 1994 (and with 1 independent) and the Democrats getting 232 (with no independents) this year. The reason that the heavily Democratic vote did not translate into more seats is, no doubt, a testament to the improvements over the last decade in the art and science of gerrymandering.

Monday, November 27, 2006

Apparently, critics of limited liability have been around for a long time. From Gilbert and Sullivan's Utopia, Limited, the song Limited Liability:

MR. GOLDBURY.Some seven men form an Association, (If possible, all Peers and Baronets) They start off with a public declaration To what extent they mean to pay their debts. That's called their Capital: if they are wary They will not quote it as a sum immense. The figure's immaterial--it may vary From eighteen million down to eighteen pence. I should put it rather low; The good sense of doing so Will be evident at once to any debtor. When it's left to you to say What amount you mean to pay, Why, the lower you can put it at, the better.

CHORUS. When it's left to you to say,What amount you mean to pay, Why, the lower you can put it at, the better.

MR. GOLDBURY. They then proceed to trade with all who'll trust 'em, Quite irrespective of their capital (It's shady, but it's sanctified by custom); Bank, Railway, Loan, or Panama Canal. You can't embark on trading too tremendous-- It's strictly fair, and based on common sense-- If you succeed, your profits are stupendous-- And if you fail, pop goes your eighteen pence. Make the money-spinner spin! For you only stand to win, And you'll never with dishonesty be twitted.For nobody can know, To a million or so, To what extent your capital's committed.

CHORUS. No, nobody can know, To a million or so, To what extent your capital's committed.

MR. GOLDBURY. If you come to grief, and creditors are craving, (For nothing that is planned by mortal head Is certain in the Vale of Sorrow-saving That one's Liability is Limited),-- Do you suppose that signifies perdition? If so you're but a monetary dunce--You merely file a Winding-Up Petition, And start another Company at once! Though a Rothschild you may be In your own capacity, As a Company you've come to utter sorrow-- But the Liquidators say, "Never mind--you needn't pay," So you start another company to-morrow!

CHORUS. But the Liquidators say, "Never mind--you needn't pay," So you start another company to-morrow!

Saturday, November 04, 2006

In a recent post, I commented on two articles in the WSJ, one in the news section and one on the Op-Ed page. The employment numbers used in the Op-Ed piece seemed to me not to be credible. After some investigation, I discovered that the Op-Ed piece used the so-called "household survey" which reported significantly greater employment growth than the "payroll (or establishment) survey."

I looked at the data more closely and must come down on the side of the establishment survey. The simple arithmetic looks like this. Social Security tax collections were up 5.35 percent in fiscal year 06 compared to fiscal year 05. The average weekly wage rose by 3.9 percent, which implies job growth of 1.4 percent. Reported job growth in the establishment survey matches this closely, at 1.44 percent. However, we know that the Labor Department will add in 810,000 jobs to its March 2006 number in its benchmarked revision (these additional jobs are wedged in over the prior 12 months). When the data is adjusted for these additional jobs, the establishment survey shows job growth of 1.9 percent for the fiscal year, substantially more rapid growth than is implied by the growth in Social Security tax receipts.

There are complicating factors here -- self-employed workers pay SS taxes, but are not counted in the establishment data, many government workers don't pay into SS -- but these are not likely to change the basic story. It is implausible that the establishment survey is understating job growth, and it may well be overstating it.

Given a prince elasticity of -0.4 for total cigarette sales and -1.2 for teenage smoking participation, a 25 percent increase in the excise tax could be expected to reduce industry sales to about 1.2 percent below what would be expected in the absence of such an increase, and to reduce the number of teenage smokers to 3.5 to. 4.0 percent.

As even the Tax Foundation admits, cigarettes are highly addictive. The ability to quit is related to the age at which one begins smoking--it's easier to quit the later you begin. Although I've seen no specific studies on this, one must assume that price elasticity is even more pronounced among younger teens. Thus, it makes good public health policy to increase the cost of cigarette consumption by increasing excise taxes. Thus, increasing excise taxes will have its greatest impact on those physically most at risk and will have positive effects for years going forward.

The Cato study cited by TF is fairly irrelevant. It deals with cigarette smuggling into New York state and New York City which had high excise taxes relative to the rest of the country. The conclusion, that excise taxes always increase bootlegging, is simply not supportable. The correct conclusion is that excise taxes that are higher than those in jurisdictions that smugglers can easily travel to and from (e.g., North Carolina) can trigger an increase in criminal activity. However, that is not likely to be the case if, for instance, taxes are increased by a majority of all taxing jurisdictions. Moreover, to the extent that high excise taxes, coupled with a variety of other anti-smoking programs, reduce teen smoking, over time the demand (and the profit in smuggling) will decline. In fact, that's exactly what's been happening for a number of years.

Just because a tax (or, for that matter, any enactment) has negative effects is not, in and of itself, a basis for opposing the tax. One has to weigh the negative impact (e.g., smuggling) against the positive effects (e.g., reduction in teen smoking, leading to a long-term, overall reduction, leading to a reduction in cigarette smuggling). TF offers only a one-eye view of cigarette excise taxes.

Finally, in 2003, a California study concluded that "[p]reviously published studies that analyzed data from various time periods between 1950 and 2000 have estimated that 2% to 6% of cigarettes are smuggled within the United States" and that "the tobacco industry exaggerates smuggling claims." Thus, it's not at all clear that any increase in cigarette bootlegging is a major criminal problem.

The other two, Docuticker and Open CRS Network, have a large amount of research material. While the majority of the material on those sites is not tax or business related, the quality of what can be found there makes it almost imperative that these sites be included in the search engine.

Monday, October 30, 2006

You can now find on the right side of the page a search box below the title "Search Tax & Business Law Commentary Google Co-op Search Engine." This will allow readers to conduct Google searches that are limited to various tax and business blogs and other related sites. Thus far, the search engine is limited to searching the following sites:

The purpose of the co-op search engine is to allow searches on tax and business law topics where the sites that will be searched are narrowed even before the search is initiated. I will be adding additional sites as time goes on and suggestions are appreciated.

To understand what actually occured, one has to know a little bit about unemployment insurance and the Maryland Unemployment Insurance Trust ("UIT").

Unemployment insurance is funded by a payroll tax. The tax is earmarked for a fund, the UIT. Financial demands on the UIT increase when unemployment rises and decrease when it falls. During recessionary periods, when unemployment is high, these demands threaten the solvency of the UIT.

In order to avoid a situation where the UIT became exhausted and could not pay unemployment insurance benefits, the General Assembly enacted a supplementary surtax that kicked in whenever the reserves in the UIT fell below a designated level. This determination was made every September 30. If on that date the reserves had fallen below 4.7 percent of the previous year's state-wide taxable wages, the surtax was triggered. The surtax applied to wages paid beginning in January of the following year. Due to sluggish labor market growth, the surtax was in effect for 2004 and 2005.

Maryland's method of funding the UIT had been criticized for a number of years. Among the criticisms was the fact that the surtax was triggered during times when the labor markets were under the greatest pressure. Because the surtax raised the cost of labor, it created a disincentive to hiring and wages at a time when tax incentives should have been pulling in the opposite direction. See here.

In 2003, a special task force was created to revise the way the UIT was funded. As a consequence of that task force's efforts, a comprehensive change in the funding mechanism was enacted by the General Assembly, Ch. 169 Laws of Maryland, 2005. That statute established a single experienced tax rate system to replace the previous experienced rates and flat-rate surcharge system. Six tax rate tables were established. The table used for a particular year now depends on the UIT balance from the preceding September 30 as a percentage of total taxable wages. The rate tables can be found here.

Gov. Ehrlich did not cut taxes on September 30. What actually took place was that the Division of Unemployment Insurance followed the mechanical procedure that had been mandated by Ch. 169 as enacted by the General Assembly in 2005. When it utilized this mandated formula, employers' were required to make unemployment insurance contributions based upon a lower rate table. The change in the formula used was due to the improvement in the labor market as the country came out of the recession: more money flowed into the UIT because of the increase in employment due to the (shallow) recovery and unemployment rates fell slightly, reducing demands on the fund.

Presented in this way, it would appear that there are merely two economists who simply reach different conclusions after reviewing the same data. However, further investigation of one portion of the Wesbury piece exposes his essential intellectual dishonesty. Specifically, he states that:

During the 12 months ending in September 2006, the [Bureau of Labor Statistics] household survey reported 2.54 million new jobs. Going back 24 months shows 5.5 million new jobs, an annual average of 2.75 million. This exceeds the booming 1995-2000 average of 2.34 million new jobs per year. The household survey, in contrast with the establishment survey, has consistently signaled a resilient economy. And it continues. In the past two months, the household survey has expanded by 261,000 per month, while the establishment survey rose by an average of just 120,000.

Let's see who has the intellectually honesty to step up to the plate with a big mea culpa. You may assume any of the original advocates of this now totally untenable position [that the unadjusted household survey is more accurate] who adhere to it are little more than partisan hacks, and disregard them as appropriate.

Just so the record is clear, here's the Employment, Hours, and Earnings from the Current Employment Statistics survey (National) on a monthly basis from January, 1992, through September, 2006:

(Click to enlarge.)

Do the math: During the 96 months of the Clinton Administration, the country added 22,635,000 jobs or almost 236,000 jobs a month. By contrast, during the 79 months of the Bush Administration, the country, on a net basis, has added only 3,109,000 jobs, or just a shade under 40,000 jobs a month. Even isolating the most recent 24 months, as Wesbury does, we find that only 4,026,000 jobs have been added or an average of just 167,750 per month. In other words, even when rebounding from a recession, job growth during this Administration is just over 70% of what it was during the Clinton Administration.

(Wesbury also wrongly states that the "the booming 1995-2000 average [was] 2.34 million new jobs per year." In fact during the 60 months from January, 1995 through December 2000, a total of 16,428,000 jobs were created, an average of 273,800 jobs per month or 3,285,600 jobs per year.)

In the end, the Nobel guys tend to shoot straight. They get on the first page of the WSJ. On the other hand, "partisan hacks" are relegated to the knave opinion page.

Florida is one of numerous states to authorize a tax specific to telecasts of boxing. As these taxes are specific to a type of television programming, they should be held by courts to be content-based restrictions on speech. However, boxing and other sports have been denied the protections of the First Amendment because they are deemed to be non-expressive. An historical and literary analysis of boxing demonstrates that the sport satisfies the Spence test because boxers intend to express particularized messages which are understood by their audiences. When strict scrutiny is applied to taxes on boxing telecasts, the state's interest in raising revenue is outweighed by boxers'—and their promoters'—freedom of expression.

Stein quotes Norman Mailer at length in an attempt to show that "[a]lthough the expression inherent in boxing cannot be neatly categorized, it is expressive conduct that conveys a specific message that has a substantial likelihood of being understood nonetheless."

Somehow, I can't buy the argument the two guys beating their brains out is an exemplar of "expressive conduct." However, I am sensitive to the argument that (i) there's a potential slipperly slope here and (ii) the power to tax is the power to destroy. For instance, if the state can tax boxing while exempting other sorts of content, what's to stop it from imposing a tax that is so high that it would, in effect, ban any show with any erotic material (however loosely defined) from the cable-ways.

Ultimately, of course, the state's efforts in this regard will fail. As I noted earlier, once the internet pipes get big enough, the broadcasters of internet content will be beyond the reach of state sales tax assessors. Anyone who doesn't think that boxing matches can't be moved offshore simply does not remember "The Thriller In Manilla"

In August, I commented on the creative tax planning efforts of Congressman Gary Miller (R. CA). Representative Miller rolled over the profits from real estate sales not once, but twice, pursuant to the provisions of IRC §1033. He claimed that the properties were sold under threat of condemnation, even though he faced no actual threat of condemnation. To bolster his reporting position, he asked Monrovia, California to provide him with "a letter that talked about eminent domain."

Last week, on similar facts, the Sixth Circuit, in U.S. v. Harris, affirmed a conviction for tax evasion. The pertinent portions of the opinion (which begin on page 77 of the slip opinion) should make for chilling reading by Rep. Miller:

The evidence against Kotula [one of the defendants] on the tax-evasion count is not overwhelming, either in absolute terms or compared to the conspiracy evidence against him. But it is sufficient to support his tax evasion conviction under the very deferential standard for reviewing jury verdicts.

In 1998, Kotula sold his own land to Ashtabula County, Ohio for $425,000. The sale contract recited that Kotula was selling the land to avoid eminent domain. Kotula made a $382,000 profit on the sale, on which he owed federal income tax of $82,000. The parties agree that Kotula did not list the profit on his 1998 federal income tax return.

The government charged that Kotula's failure to report the land-sale gain in that year constituted willful attempted evasion. Kotula's defense is that 26 U.S.C. § 1033 allows a taxpayer to defer gain from a sale made under threat of eminent domain if they use the proceeds to buy replacement property within a certain period of time. As Agent Fisher testified, if the taxpayer meets the requirements, he is not required to report the gain in the first year following the sale.

The government alleges that "several Ashtabula County officials" testified that the land-sale agreement's references to eminent domain were a "sham," but the government fails to point to particular testimony using that word. The government relies on the testimony of current and former county commissioners that the county never suggested that it was considering using eminent domain to take Kotula's land, that it was Kotula alone who insisted on inserting the eminent-domain language, that the commissioners knew eminent domain was unpopular and so would not use it lightly, and that the county had probably not used eminent domain in the twenty years prior to the county's purchase of Kotula's land.

* * * * *

On this record, a reasonable factfinder could find that it was not reasonable to fear eminent domain under the circumstances. With or without such a finding, the factfinder could conclude that Kotula did not actually have a good-faith belief (reasonable or otherwise) that his property was threatened by eminent domain so as to trigger the deferred-reporting provision of IRC §1033.

Immigrants and their U.S.-born offspring accounted for 55% of the increase in [U.S.] population [from 200 million to 300 million] since 1966-67. 3 Within this group of 55 million, Latino immigrants and their offspring were by far the largest, representing about 29 million persons, or 53% of the addition due to immigration . . . .

Strikingly, Hispanics constituted only 4.25% of the U.S. population in 1966. In the last 40 years, that figure has grown to 14.9%. The percentage of Americans classified as "White" has fallen from 83.6% to 67% over the same period.

Thursday, October 12, 2006

The documents reviewed by the Minority staff raise several issues with respect to [Americans for Tax Reform]’s compliance with current tax laws. As a threshold issue, many of the activities alleged in the e-mails reviewed by the Minority staff indicate that ATR may not be primarily operating to further social welfare purposes, which is a necessary condition of tax-exempt status as a section 501(c)(4) organization. In addition, the documents raise questions whether ATR should have reported income from some of its activities as taxable income. Finally, the e-mails raise questions as to whether insiders at ATR, including [Grover] Norquist, used ATR primarily for their own or Mr. Abramoff’s private benefit. Violations such as these could, under certain circumstances, result in penalties under current law, including excise taxes on officers of ATR, revocation of ATR’s exempt status, and even criminal tax fraud penalties.

Today, the Maryland Court of Appeals issued an opinion in the case of Ehrlich v. Perez that illustrates that (i) in some cases, rights that we tend to think of as being rooted solely in the U.S. Constitution (in this case, the right to equal protection under law), can also find alternative bases for support in state constitutions and (ii) the Republican Party is doing its best to run headlong off of a demographic cliff.

At issue in the case was a preliminary injunction forcing the state of Maryland to provide medical assistance benefits to resident alien children and pregnant women who immigrated to the United States on or after August 22, 1996. A federal law, The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, generally know as the "Welfare Reform Act," was enacted in 1996. As described by the Court of Appeals:

The [Act] states: "An alien who is a qualified alien (as defined in section 1641 of this title) and who enters the United States on or after August 22, 1996, is not eligible for any Federal means-tested public benefit for a period of 5 years beginning on the date of the alien's entry into the United States with a status within the meaning of the term 'qualified alien.'" 8 U.S.C. §1613(a). Among the provisions of the W elfare Reform Act was the elimination of all benefits for illegal immigrants and other "non-qualified aliens," with a few limited exceptions such as emergency medical care. 8 U.S.C. § 1613. In doing so, Congress divided the two qualified alien categories into two subcategories: (1) qualified aliens who have resided in the U.S. since a time prior to August 22, 1996. . . .Some states were required to provide funding to the first subcategory of qualified aliens. . . . However, a period of five years residency in the U.S. was required for the second subcategory. . . . Congress then authorized the States to enact any law after August 22, 1996, should they choose to compensate this newly designated class of ineligible aliens, provided they use only State funds.

(Some internal citations omitted.)

In 1997, the Maryland General Assembly enacted Md. Ann. Code, Health-General Article §15-103(a)(2)(viii), which provided "comprehensive medical care and other health care services for all legal immigrant children under the age of 18 years and pregnant women who meet [Medicaid] eligibility standards and who arrived in the U.S. on or after August 22, 1996." In 2006, however, Governor Ehrlich cut funding coverage for this part of Medicaid in the budget that he submitted to the General Assembly. (In Maryland, the General Assembly cannot add or increase funding beyond what the Governor has proposed.)

The Circuit Court for Montgomery County issued a preliminary injunction ordering that the state (i) provide Medicaid coverage for all those within the ambit of §15-103(a)(2)(viii) and (ii) reimburse recipients for the benefits that had been denied to them before the date of the order. The injunction was based on the equal protection provisions of Maryland's constitution set forth in Article 24 of Maryland's Declaration of Rights.

On procedural grounds, the Court of Appeals rejected that part of the Circuit Court's order requiring reimbursement of past benefits. The vacation of that part of the order was based solely on the fact that the preliminary injunction remedy is designed to maintain the status quo. An an order that requires payment for benefits provided before the dispute came before the court is equivalent to a judgment in favor of the plaintiffs prior to a complete adjudication of the dispute. However, the Court upheld the injunction insofar as it requires that, while the litigation process is ongoing, the state must continue to provide benefits.

The holding of the case is narrow. If the federal statute had explicitly required that the states deny non-qualified aliens Medicaid benefits, the exclusion would likely have been upheld under the Supremacy Clause. Under those circumstances, the question would have become whether there was a rational basis to conclude that statute furthered the exercise of a particular federal power, namely the power to control immigration. However, because there was no federal mandate prohibiting the states from providing benefits, the more stringent "strict scrutiny" test was applied to determine whether the budgetary exclusion denied the plaintiffs their Equal Protection rights. And, by bottoming its opinion on a provision of the state constitution, the Court of Appeals precluded any Supreme Court review of the Equal Protection question. (Although, various other questions, e.g., a somewhat different "Supremacy Clause" issue raised by the state, could theoretically be appealed to the Supreme Court.)

The opinion comes a day after a story in the Baltimore Sun, Latinos' power in numbers-Naturalized citizens are becoming a political factor in Maryland that demands to be recognized, highlighting the growing political importance of Hispanic voters in Maryland. Those voters will presumably remember that Ehrlich's attempt to cut benefits to pregnant women and children was nothing more than a gratuitous slap at immigrants. As the opinion notes, this budget cut would only achieve "a cost savings of seven million dollars . . . of the four billion dollar budget appropriated for medical assistance health care costs generally."

I suspect that, in the short term, Republicans can mine anti-immigration sentiment to their electoral benefit. In the long run, however, the children and grandchildren of immigrants will remember the nativist enmity stirred up by Republican politicians. That will ultimately crush the party.

Tuesday, October 10, 2006

There's been a debate, of sorts, between Grover Norquist's Americans for Tax Reform and the folks over at Citizens for Tax Justice over the question of whether state tax rates cause individuals to migrate from higher tax states. The ATR paper is here and the CTJ argument, linked to three studies of specific states, is on its weblog here.

The ATR analysis is singularly unconvincing. It includes a nifty chart sourced to "Vedder" with no additional information that would allow one to verify the chart's accuracy or to make a separate analysis to determine whether other factors were at work. (Presumably, "Vedder" is Richard Vedder of Ohio University and the Heartland Institute.)

The Iowa study was rather narrow in scope. It was designed to address an argument made in support of a particular piece of legislation before the Iowa legislature that would have provided various income tax exemptions to the elderly. The study showed, convincingly I think, that Iowan income tax rates did not cause significant out migration of the elderly from the state. However, the paper did not fully address the more basic question: Do taxes, in general, cause emigration from high to low tax states?

The New Jersey study dealt with the broad question of whether income tax caused net emigration from that state. It concluded:

It is impossible to tell from the IRS data the reasons why people leave or come to a state. However, the numbers for New Jersey would seem to suggest that the regional and national economic situation is an important force, especially in view of the fact that in most years outflow and inflow either rise together or fall together.

But it is equally impossible to interpret the data as in any way showing that changes in New Jersey's income tax rate-up or down-have an impact on whether high income families-or any families-choose to come to the state or to leave it.

One could just as easily, and perhaps more plausibly, conclude that the tax driving people out of New Jersey is the local property tax, since this tax takes a higher percentage of the yearly income of low- and middle-income families than it takes from the wealthiest-so that an increase of even a few hundred dollars is more noticeable to those families than an income tax increase that amounts to a relatively smaller percentage of a wealthy family’s income.

Finally, the Ohio study also limited itself to the affect of income tax on migration and concluded that "migration does not appear to be linked to income tax policy. Policymakers seeking to prevent outward migration should look to policy other than income-tax policy to alter the trend."

Clearly, taxes do have some effect on interstate migration. For instance, I know from my practice that state estate and inheritance taxes will cause some high wealth individuals to relocate. However, it would be virtually impossible to design a study that could isolate and measure the effect that these taxes have on migration. There are likely to be a large number of other factors at work and, more importantly, the number of people affected by these taxes is statistically small.

One of the problems with all of the studies is that there are generally so many factors that bear on an individual's decision to relocate it is virtually impossible to isolate the affect attributable to taxes. For instance, do people move to low tax states to avoid taxes in their state of origin, to enjoy a warmer climate, or to take a job at a non-union factory because work at older, union manufacturers has dried up? And, to the extent that the move is motivated by tax considerations, to what extend are the emigrants fleeing property tax assessments that fund primary and secondary education? If this last factor proves decisive, to what extent are the emigrants really defaulting on their responsibilities (i.e., "The state already paid for my kids' education. The hell with the next generation.")

It is anticipated that Maryland will have a huge increase in population over the next 10 to 15 years caused by the expansion of Aberdeen Proving Grounds, the NSA facility at Fort Meade, and the military's biological research facilities at Fort Detrick. Under these circumstances, unless Maryland's tax system becomes outright confiscatory, there will be little, if any, affect on immigration to the state. The population will increase because there are good, well-paying jobs available.

I think that, in general, similar, non-tax forces are at work causing either immigration to or emigration from various states. With some isolated exceptions (Nevada comes to mind), I think that the amount of taxes imposed on individuals is of little moment in determining emigration or immigration. But, as yet, I have little to go on in reaching that conclusion other than my own intuition.

The Supreme Court's holding in Quill v. North Dakota poses a significant hurdle to the states' efforts to impose sales tax on electronic media of any sort. In essence, that opinion requires that there be some significant physical contact with a state before the state can establish sufficient nexus to impose a sales tax. With respect to iTunes, the states probably can effectively impose a sales tax because Apple has sufficent contacts with almost every state to meet the nexus requirements of Quill. However, that is principally because Apple sells and services its computers and MP3 players throughout the country. If Apple were merely in the business of selling the music, it would likely not have a physical presence in any state that imposed sales tax on electronic media. Effectively, the states could not tax these sales.

However, as Apple's relative market share declines (it now controls about two-thirds of the market), the ability of the states to collect tax on the sale of electronic music will also decline since market share will inevitably be gained by companies whose only business is the sale of electronic media over the internet. (Note: Theoretically, the states would lose nothing since consumers who fail to pay sales tax are required to pay use tax. Consumer self-reporting and payment of use tax is, for all intents and purposes, however, non-existent.)

There have been bills introduced in Congress that would overide Quill and allow states to impose sales taxes on internet sales. While such legislation might work with respect to internet sales of tangible property, intangibles, such as software and electronic music downloads, would still be problematical. After all, so long as the servers that provide the downloads are located outside of the U.S., the purchase of downloads would still be sales tax free.

Saturday, October 07, 2006

Today's WJS editorial page touts the decline in the size of the budget deficit from the amount previously projected. Iit, correctly, attributes the decline of the deficit to increases in tax revenue. (The CBO press release on the deficit number is here.) However, it incorrectly finds that the Bush tax cuts are the underlying cause of the increase in tax revenue.

Members of the Administration are touting the revised deficit estimate, and its cause, as a sign that tax cuts are working as intended. Excuse me, but that makes no sense. Without the tax cuts there would be little or no budget deficit. So we're supposed to cheer because the mess isn't quite as bad as it appeared to be? I'd be impressed if the revision showed a budget surplus, because THAT would demonstrate the validity of the "cut taxes, double revenue" nonsense spouted by the "I refuse to pay taxes because I'm special" crowd and the "I cannot pay taxes because I'm selfish" group.

A closer look at the source of the increased tax revenue is most revealing. A significant chunk of it reflects increased corporate taxes, a natural consequence of the huge increase in corporate profits during the past half-year. Most of the rest reflects taxes on high-income taxpayers who have received bonuses. The Washington Post article goes into greater detail on these points. It also explains that taxes on wages are barely increasing, because wages are increasing only slightly. In other words, the tax revenue increases are consistent with the shift of income gains away from the middle class and toward the very top of the income and economic ladders. The rich get richer ....

Making the situation worse are the allegations that the Administration initially overestimated the deficit so that it could return and claim that it deserved kudos for reducing it. That's a ploy not unlike the child who says to a parent, "Would you be upset if I told you I broke the heirloom vase?" only to follow-up with the following comment to the rattled parent, "Well, I didn't. It's just that the picture window is broken." There's one word to describe this approach: manipulative.

The CBO report explicitly notes that:

Steady growth in corporate profits probably explains most of [the increase in tax revenues in September, 2006 from those in September, 2005], although some of it likely stems from settlements of past years’ taxes and a recent change in tax law that required large firms to accelerate some payments from 2007 into 2006.

[A]fter-tax corporate profits have more than doubled, because workers' productivity is up, but their wages aren’t — and because companies have dealt with rising health insurance premiums by denying insurance to ever more workers.

This, of course, would also explain another "surprise" the WSJ editorial focuses on--the fact that the top 1% of all income earners account for 37% of revenue receipts from the individual income tax.

Angry Bear also anticipated the WSJ editorial when he published this chart from the CBO's August, 2006, estimates and made the following comments:

(Click to enlarge.)

But look at the on-budget deficit for 2006. It shows a small improvement over 2005, and then the CBO projects the on-budget deficit to worsen in fiscal 2007.

But compare 2006 to the earlier CBO estimates - 2006 is a complete disaster. And the bad news is another bubble is bursting right now (the housing bubble), and IMO the CBO estimates are once again ignoring the budget implications of that bursting bubble.

So when the Bush Administration touts their budget progress in the coming weeks, remember where we were just a few years ago. And remember where the budget deficit is likely to go. They call that progress?

The BBC is reporting that CBS's Sixty Minutes will report this weekend that a "US no-fly list used to try to prevent terror attacks [created after 9-11] includes the names of 14 of the long-dead 11 September hijackers." However:

[T]he names of the 11 British suspects recently accused of a plot to blow up airliners flying to the US were not included on the list.

Cathy Berrick, director of Homeland Security investigations for the General Accounting Office told CBS that this was due to concerns that the list could end up in the wrong hands.

"The government doesn't want that information outside the government," she said.

From the property rights perspective, large law firms are poorly suited to sustaining employment relationships because they have no enforceable means of controlling the firm's key knowledge asset—client relationships. The up-or-out partnership systems that have evolved over time in these firms offer an awkward but workable resolution to this problem. By restricting partnership size to maximize surplus per partner and by making senior attorneys residual claimants, law firms limit the opportunity for sub-groups of partners to grab and leave with the firm's clients. This action, however, creates additional demand for inexperienced associates who serve as (imperfect) substitutes for their more experienced counterparts. The result is that more associates are hired than can be promoted into a stable partnership. Those associates who do not succeed outgoing partners will be dismissed before they acquire sufficient client knowledge to themselves pose a threat of grabbing and leaving. That law firms find it worthwhile to commit to the costly practice of firing qualified attorneys in order to retain control over client relationships points to the general importance of control over assets in more conventional employment relationships.

The authors study available data to determine whether the data can justify alternative theories, such as the "dual incentive" theory. "According to this [theory], law firms create incentives for associates to invest in firm specific skills by promising a valuable promotion to some or all of the associates who undertake the investments. It is difficult, however, for outsiders to monitor whether the associates have actually met the firm's requirements. This gives the employer an incentive to cheat the associate by denying promotion even when the associate has performed as the firm desires. Since the employees anticipate cheating by the firm, no investments in firm specific human capital are made."

Ultimately, they reject the dual incentive theory because the alternative "grab and leave" "model predicts that large law firms, with long-standing relationships to important corporate clients, would implement a kind of legal production technology that would keep non-partners at arms-length from clients." The authors' examination of the increasing amount of time attorneys spend on client contact as they move up the seniority ladder leads them to conclude that the grab and leave model is in operation at large firms.